Q1 2021 TFI International Inc Earnings Call
Okay.
Good morning, ladies and gentlemen, thank you for standing by.
Welcome to T F. I internationals first quarter 2021 results conference call.
At this time all participants are in a listen only mode.
Following the presentation, we will conduct a question and answer session.
Callers will be limited to one question and one follow up in order to keep to as many callers as possible.
For the instructions for entering the key will be provided at that time.
Before we turn the call over to Amazes me and please be advised that this conference call will contain several statements that are forward looking in nature and are subject to a number of risks and uncertainties that could cause actual results to differ materially from those anticipated.
Also as a reminder, T S. I changed his presentation currency at year end and all dollar amounts are in U S dollars.
Lately lastly, I would like to remind everyone that this conference call is being recorded on Wednesday April 28, 2021, I will now turn the conference over to Allen Bedard, Chairman, President and Chief Executive Officer of T. F. I International. Please go ahead Sir.
Well. Thank you very much for the intra and introduction operator, and I'm pleased to welcome everyone to this mornings call yesterday and.
And after the market close we released our for <unk> 2021 results.
First quarter 2021 of the results. So do you find international added and exceptionally strong quarter to begin the new year.
A quarter that marked the one year anniversary of our listing on the New York stock exchange during the height of the pandemic. We made the right moves to preserve our long term growth opportunities and we are beginning to see the benefits we maintain a relentless focus on the fundamentals of the business and on getting the.
Details right, we look for opportunities to enhance efficiencies as we do in good times and bad and.
And as always we look to increase returns on invested capital optimize our free cash flow and grow our earnings per share.
This in turns and place us in a position of strength with a strong financial profile that allows us to strategically expand our business with the ultimate goal of creating long term shareholder value and returning excess capital to shareholders whenever possible.
You're on to the identification of strategic accretive acquisition opportunities is another important part of our strategy and a highly disciplined manner. We have continues to selectively seek acquisition candidates that are both accretive and strategic to extend and see it finds the nationals long and successful track record.
Growth through M&A.
As you know in January we announced an agreement to acquire U B S right and one of the most strategic transaction and our company's history. The acquisition immediately propels Tia Fire's international to become one of the five largest north American and the L. T O carrier.
It was strength and our service offering and accelerates our strategic expansion across the U S and fortify our ongoing relationship with UBS.
This transaction is on track to close this quarter.
Now, let's turn to our first quarter results that includes strong year over year growth and both revenue and operating income despite very solid results a year ago.
Our total revenue for the quarter.
For the first quarter of $1 1 billion was up a very robust 24 per cent compared to the prior year's first quarter again, despite most much of the prior year's quarter being before the pandemic Jos.
Just as important to us given our focus on profitability and despite significant and one times items.
I'll discuss our operating income grew 17, seven and 8% to 102 million and our adjusted EPS on a diluted basis expanded 26% to 77 cents.
Our net cash from operating activities was 155 million up 13% over the prior year as you know we consider this strong cash flow to be strategically importing and.
And allowing us.
And to invest and our business and seek and seek out day attractive expansion opportunities.
Regarding those one time items, the first relates to the mark to market of our cash sell director share as unit.
Or the issues due to the rise and our share price during the first quarter decided a seven cents impact on our adjusted diluted EPS, which was further impacted by a cent per share of transaction expenses related to the acquisition of U P. S rate and total that's eight cents on.
Combined the one time cost.
Let's now take a more granular look at the operating results for each of our for segment.
All of which contributed to our strong overall performance.
Starting with our package and courier.
P&C represents 13% of total segment revenue and saw a 26% increase and revenue before fuel surcharge versus the prior year.
Operating income of $18 3 million and expanded uneven greater 58% with and the operating margin of $13 nine up 200 basis 280 basis points.
This strong growth was driven by improved yields on both b to C and b to B activity, which have continued to rebound this year.
Please with our more balance it makes it a b to C and b to be following the pandemic and see additional growth opportunities ahead.
Our <unk> segment also 13% of total segment revenue generated revenue before fuel surcharge of $132 million essentially flat compared to the prior year quarter.
While demand is still feeling the effect of the pandemic most important to us on L. T. L. Operating margin expanded more than 700 basis point to 16 point aid from the less than 10 per cent a year earlier.
Driving and nearly 70% increase and operating income to $22 1 million.
This strong growth and the operating income benefited from strategic consolidation and the over the road operation as well as a $2 7 million contribution from the Canadian and wage subsidy.
Next is our truckload segment, which represents 41% of total segment revenue revenue before fuel surcharge was up 7% year over year, while operating income was up 8% to $50 million, reflecting a slightly higher operating margin of 11 eight.
Our growth and this segment was driven mainly by business acquisition as well as strong spot pricing and tight capacity and the U S market offset by severe winter weather.
Within truckload, our U S operations saw a 1% decline and revenue before fuel surcharge well, our Canadian operation grew 6% and our specialized business grew 13% we.
We also had a $2 7 million overall benefit from the Canadian wage subsidy.
Rounding out rounding out our business segments logistics represent 33 per cent of total segment revenue our revenue before fuel surcharge jumped nearly 90% driven by e-commerce strength, and Canada as well as acquisition over the past year, our operating margin opening income was up 52% to $20.
$9 1 million.
<unk> a margin of seven 7%.
Now turning to our bond sheet and remains a significant significant source of strength for <unk> International that allows us to execute our growth plan by making disciplined investment both in organic growth and attractive M&A opportunities.
Our strong free cash flow of 143 million allows us to end the quarter with more than $1 3 billion of liquidity benefiting from January and private placement of $500 million and senior notes, which also ex substantially extend maturities to between eight and 15 years at fixed rate.
Lastly, I wish to provide our outlook for the year.
A range, which include a range of.
$3 80 to $4 of earnings per share.
And 475 to 525 millions of free cash flow.
In addition, despite the anticipated closing of the UBS for each acquisition, we expect our leverage to remain below two times next quarter and for the rest of 'twenty one.
Please note that this leverage calculation refers to the funded debt to EBITDA ratio as calculated in accordance with our debt covenants and as set forth in our quarterly MD&A.
In summary.
The past 12 months have been like no others.
But at <unk> International we stuck to our game plan throughout.
We focus on the fundamentals of the business to maximize profitability and cash flow.
And we carefully considered capital allocation to further enhance value.
The economy outlook remains fluid.
But you can rest assure that we will stick to our approach no matter what the future holds.
Today, we're and the best positioned and our company's history and.
And the pending acquisition of EPS Reid will make us even stronger.
Together, we look to create additional shareholder value by constantly driving efficiencies and focusing on profit growth profitable growth.
Ultimately our goal is to create and unlock shareholder value returning excess capital to our shoulders whenever possible and with that operator.
You could please open up the lines for Q&A.
Ladies and gentlemen.
A question you weighted to press star one on your telephone keypad to withdraw your question. Please press the pound key our husky.
Call. It will be limited to one question any follow up and I wanted to get to as many comments and possible again Thats star one to ask a question. Please stand by while we compile the Q&A roster.
Yeah.
And your first question is from the line of Scott Group with Wolfe Research.
Hey, Thanks, good morning Alain.
On a.
Can you just walk us through some of the revenue and margin expectations for each of the segments within the guidance and just clarify if you're including UBS freight and that guidance for now.
Yeah, Yeah, well absolutely sold for sure UBS freight is included in the guidance, Okay, let's say for about seven months.
But if you remember I mean, the profitability of <unk> is very limited okay and.
So yes, it's in there okay. That's for sure now in terms of the rest of our.
Business I mean, what we see so far.
And you look at our P&C.
And as up Okay, and was up about 20% and Q4 about the same thing and.
And Q1, and we anticipate the year to be probably in the same kind of fashion sorry P&C we.
And we see a lot of organic growth there.
And as you could always take a look when you look at the results.
Chose also on the operating earnings L. T L. Excluding the acquisition of UBS freight we believe that the revenue is going to be a flat, okay, but the profitability will who will stay on the same kind of neighborhood profitability that you see now because we're more about making money than chasing volume.
And that's a that's a religion at <unk>.
And if you look at the U S T O.
We think that Q1 was a little bit of a disappointment.
And in a sense that you know February was tough for us.
But when we look at the rest of the year, we see that situation should keep improving.
Same story for our Canadian truckload and those specialty truckload.
On the logistics side.
The acquisition of <unk> last year was a major plus for us.
We're still working to Honda oak ourselves from the previous owner.
Through the TSA that we have with them.
Probably it should be done by the summer.
And then we believe that the overhead should reflect a more.
Better efficient cost basis, I could say.
Now Oh and all this is why we feel pretty good about the $3 80 to $4 of EPS.
And in the rest of you know for the total 2021 year.
Again this is based on what we know today about the <unk> contribution which is minimal.
It also reflects above a 325 million U S. D of Capex, which is way more than we normally would do.
Because there again, we're investing more dollars into the EPS fleet then.
Would be normally done right.
So it's still it's still a conservative I think forecasts that we have for the year on terms of EPS and free cash flow.
But also the important thing is our leverage will stay on day two.
Even with the acquisition of UBS.
And when we say on there too is probably like more like $1 75 to two.
Being tubing maximum where we're not going to get there too right. So are we.
We feel really good about the 'twenty, one and what we can do about that but there again I mean, we still have to close this transaction with UBS, which we anticipate is going to be really soon and then.
And then.
You know Paul and his team over there at UBS right I mean, they're fully fully aware of.
The plan, what we want to do and how we.
And you're going to approach this.
And I've said it many times our first approach at UBS right is to work on the cost and.
And to <unk>.
New trucks and will help us on on maintenance costs will help us on safety.
Because these equipment have the safety features of trucks that are built in 2022.
The forward facing camera.
Also the driver.
Experience and driving a new truck versus an older. One I mean, its day and night. So all of this we believe that our first step working with the team there to reduce costs and be more efficient and then slowly for sure will address the situation of of rates that are maybe not reflect market rates today.
Okay. So yes, I just wanted to that was my second question was it was about EPS right now as you've done more work since three months ago I had a closing the deal has anything changed in terms of your near and long term margin expectations. Maybe have you had conversations with customers about.
Revenue retention and things like that just any thoughts there. Thank you.
No no change really I mean, it's just a confirmation of what we've been able to do over the last few months is just to confirm the plan that we have and we feel very strongly that this is a great plan and we have the support of the management team there and they understand okay, where we want to go.
And.
This is why and when we say that within a year, we believe that UBS could be a 97 and the war.
We still very firmly believe that and within three years and we don't see any reason why this company with the potential customer base and the relationship that we have also with UBS.
There's no way I mean, we still feel very very strongly that we could be a 90 or within three years.
Your next question is from the line of corn on Gupta with Scotiabank.
Thanks, and good morning Ali.
And cannot.
So let me close on.
On the Capex a clarification you said 325, I guess is that a gross number or is it net of any aspect of it but it's not true.
It's net net of disposal Gardner Yep.
A few items.
U S.
Canadian dollars and 400 U S is about $3 25 or something to that.
Great. Okay, and then thanks for that and so on my first question is on the UBS acquisition. So UBS reported obviously this week and I think they were saying the freight segment had a pretty good.
Quarter.
I think they had record profitability there for.
For them.
I'm wondering your thoughts on and defense that and how.
As the UBS, great doing right now where you saw them when you are acquiring them.
And how does that kind of.
Push up your goals or aspirations at the margin.
Very good question and Canaria, but.
We're very conservative so I'm not going to see something different from the UBS management team I mean do you still on the company. So when they said that they had their best quarter I mean they.
And they know what they're talking about.
So for sure the trend Okay is improving over there for sure market condition is also improving.
So if you asked me. The question is the company to day better. Okay. In Q1 of 21 and then it was let's say in Q1 of 'twenty or.
For sure. Okay. So we are buying a company right now that the trend is improving every day, yes, but we're still coming out with something very conservative right. This is this is the culture at the tier five has always been on the promise, but over delivered right. So we're not going to say.
Oh, we're going to come up with $4 50 or whatever no.
280 to four and then you know we may revisit that after Q2 okay.
Or after Q3.
After we have a little bit better.
Control of the situation that GPS right because don't forget. This is also based on on a plan. When we look at UBS right that we are not in control today I mean, we're looking at the trend we're looking at the plan we think it.
Now for.
I know the guys are doing a fantastic job well, we will just work with the team to improve that right.
Yes, and that makes sense.
Good color Adam.
And then secondly, if I can ask you on the pricing you mentioned about the strong spot pricing and the truck load market, especially I think and the U S. Yeah, There's just no surprise to anyone here.
No I'm wondering what your thoughts are on the on the pricing going wallboard and maybe what are you seeing that but obviously fuel kind of rebounding.
And I think the demand function demand is pretty strong at this point, but curious for your thoughts into how.
Pricing trends over time here and for the next few quarters and the U S and the truckload as well as for any of the segments. I think you mentioned about P&C value was pretty strong and b to C and B to B book, what are you seeing and the pricing on the price inside and Pn CFO.
Well on the P&C I mean, our Q1, we saw a price increase of about 7% okay.
Volume increased about 15%, but price, 7% now like I said to our friends at UBS those guys did a better job than us because they are price was about 10% of that price increase and 12, depending on if it's domestic or international. So I mean, the leadership of UBS is helping everybody and the industry, okay to adjusted <unk>.
<unk> to a level, which makes way more sense, okay. So pricing environment P&C really good for.
<unk> environment, and our U S. T O for sure I mean, there's every morning, if you'd talked to our EVP response for USTR and he says I've got more freight than than I can handle right. It's been going on like that for at least the last four months. So for sure. This book pressures on rates.
And I was just so low.
Thing.
In the U S. Do you anticipate maybe fuel costs will go higher because they are short drivers okay.
You know fulfilling the service station with fuel and so it's a global North America and situation whereby we are short not afraid we are short of drivers right. So the rates are being pushed up okay and at the same time US also we have and and the industry. We also adjusting salaries.
So our drivers right.
So it's just a normal phase, but for sure I mean, if you look at the freight environment right now and the U S. T L. There's more freight.
Okay available that we could haul ourselves right. So every morning, we're over over book by 10 to 15 and 20% of what we can handle and customers are you know can you help us and we're trying we're doing the best we can but.
It's hard I mean to the schools okay.
Because of COVID-19 I mean.
It was like a big issue to have a school right trying to educate those those people to be drivers. It. It's a sum of all this this thing that happened over the last.
Say 12 months net.
And that create pressure and now the U S economy is doing really well I mean, we anticipate that the GDP will grow and maybe seven or 8%, okay. The numbers and I'm looking at so for sure. We got huge demand and the same story is true also in Canada for our truckload Division I mean Q1 was okay.
But wait till you see Q2 I mean.
Oh, Yeah sure we have Lockdowns right, now and Canada, I mean, Ontario, Big time, big locked down their Quebec, and not as bad, but very close now we have issues and the Maritimes and some little bit also in BC, but vaccination rollout is taking on more speed. So we believe that Q2 is still going to be you know maybe a trans.
<unk> quarter, but then three and for our Canadian activity is gonna be Roaring really really strong so the pricing environment really good I mean, we look at our logistics is the same story.
And this is why you know.
When we come out with the guidance on EPS or free cash flow.
As usual I mean.
And we'll try to beat the guidance.
Our guidance right.
Your next question is from the line of Allison Landry of credit Suisse.
Allison Your line is open.
Oh, Thanks, good Brian times down and.
Our call this morning.
And so.
I think you'd have to talk about the EPS freight acquisition.
Yes, sorry about that.
Shortly here, but presumably you're still evaluating small tuck in.
Could you give us a sense of the pipeline and.
And while there are the opportunities that has changed over the last two months and then just sort of what types of I think where things are and markets Youre looking at.
Yeah, that's very good question, Alex and so our pipeline is always for in terms of M&A, but these are small transaction I mean right.
Right now.
We're looking at about three or four transaction and Canada.
We're looking at maybe two two or three smaller ones and the U S. As well so our pipeline as always for but there again nothing nothing of the size of UBS for us in 'twenty, one and probably not in 'twenty. Two so you know.
These are nice tuck ins that we do you know small and highly profitable for our shareholders and we're going to keep on doing that absolutely now for for sure are our big focus is going to be on on working with the EPS management team.
Approaching the cause and like I said, many times, we have to reduce that caused there to be a lean and mean carrier.
EPS rate and.
That will be a big priority of ours, but okay small tuck ins M&A, it's and it's in our blood I mean, we do that all the time.
Okay and.
Just a follow up.
In terms of the free cash flow guide.
Could you maybe just.
Thanks for sticking to that.
The cadence over the next few quarters are you.
And I can see sort of relatively stable.
Or sort of any sort of <unk> and.
And the second half versus the first half.
No. The only difference that we have between let's say the first three months and the next nine months of 'twenty. One is the fact that.
Q1, 'twenty one was affected by a lot of taxes that were paid by the company. Okay for it for a reason that day, we were allowed to delay some payment and because of COVID-19, but we remitted all those taxes that have to be remitted and Q1. So this is why free cash flow is.
And a little bit affected by that but we don't anticipate anything similar in the next nine months the only major thing for us and the next.
Nine months, Okay will be capex, okay for sure.
Like I said on the call.
And B investing this year.
$325 million to $315 million net Capex USD.
And depending on the timing because you know because of the chip situation and the shortage I mean, we're not sure if everything is going to come in on time, but that's the ballpark figure.
Okay. That's really helpful. Thank you guys.
Thanks Allison.
Your next question is from the line of Kevin Chiang with CIBC.
Hey, Thanks for taking my question here.
And I could ask maybe the longer term outlook for free cash flow.
I think a guidance of $500 million, if I look at if I look at consensus revenue for this year about 6 billion and other.
It's about 8% and free cash flow margin.
But you've highlighted elevated capex with UBS, you, obviously have a target to improve profitability and a number of your operations.
When you kind of threw a lot of the heavy lifting could you give us sense of what your free cash flow margins could level out here or is this just like a low double digit free cash flow margin business.
And the mid double digit free cash flow margin business.
And looking at the next three or four years.
Well, absolutely, Kevin and I mean 500.
It's been and take up a little bit this year, okay on the exceptional capex that we have to do in 'twenty. One with this acquisition. We will also have to do a little bit also and 22 of catch up capex for for.
For this UBS for the acquisition.
But I would say that the normally normally in a normal environment, okay with all the improvements that we see coming at UBS for down the road. Okay. Absolutely. I mean, this is should be a double digit free cash flow company right our capital intensity.
And you'll see that change big time.
Because of the mix that's going to change.
Also we believe that.
At UBS right, we could do we could do more with less okay.
We believe that in terms of the assets in terms of the real estate in terms of.
All kinds of stuff I mean, we could do more with less.
The business is quite stable right now at UBS for it in terms of the <unk>.
Volume sold.
Things are going well like the management team said on the on the EPS goal.
But I think we believe that we could do more with less so over time and believe that we're gonna be absolutely you know.
Double digit free cash flow as a percentage of revenue now and they're also the important thing Kevin I am sure that you guys will take a look at the return on invested capital.
<unk>, which is a first where were looking at trailing 12 months. Okay. We are publishing that now and if you look at that I mean.
Every every division and we have are all running double digit except our.
Our U S TL operation right. So I mean, if you look at our P&C, Okay P&C.
And it's just fantastic I mean, our P&C is just above the 20th.
20, <unk> is about 15.
Our logistics and $18 six.
Our specialty truckload is close to 11.
So the combined is about 12 12 point for something like that.
Return on invested capital after tax and and don't forget. This is also based on all assets not just the odd asset. It includes all of the intangible asset as well right.
So I mean this is this is this is a fantastic company and when you look at and and adding UBS freight to the mix. Okay for sure a return on invested capital at UBS freight is going to be low okay year, one but.
But I'm, telling you I mean.
There is too much asset theres too much real estate and.
And we're going to work on it.
The revenues are and whether revenue right.
That's helpful color and then.
Appreciate the ROIC.
Disclosure this quarter, maybe just on my second question.
One of your Canadian competitors as consolidated parts of the Canadian <unk> market.
I know in the past you've talked about this market being irrational and so I'm just wondering if youre seeing anything at a high level in terms of any change and industry behavior that suggests maybe a little bit more rational behavior in this marketplace just given what's happened with.
With one of your competitors out there.
Well, we believe that the finally, it's I'm happy to see that the other company is doing something.
And we can't we can't buy them all right. So.
You know it's a good thing it's a good thing for the industry you know.
But.
We're we're really happy with that I mean, we have a great relationship with the.
The other company.
We worked together I mean, we have a very high respect for for the other group and.
And it's fine I mean, we can't buy and I'm all right. So it's good that somebody else is showing up and and doing something about you know that can eat and LDL is day and night versus the U S. L. T. O why is that well first of all because we don't have a lot of industrial <unk> and Canada.
That's a big problem, it's mostly retail.
And number two is there's way too many small companies that are about making one or 2%.
So we're happy because the other company that's buying those two companies right now their focus has never been to make two points right.
So so for sure they will have a job to do over there and and and happy to see that too.
Two companies will be part of this group now and the focus is going to be to improve profitability absolutely. That's that's all good for the industry.
Excellent and I appreciate the color on line. Thank you very much.
Your next question is from the line of <unk> <unk> with BMO capital markets.
Thank you good morning.
So city.
And.
Question on.
I mean the ROIC.
And just talked about being pretty strong pretty much across all divisions, except the U S.
PL.
I'm just wondering what are the segment kind of fit in terms of the capital allocation priority.
It's a very competitive segment, obviously your position is typically top player and most of the other segment.
And the U S and Canada, obviously and portfolio Paul.
Is this something you wanted to put more capital and you want to grow that business use conventional.
Is this something potentially candidate for divestiture, just wondering where does that sit.
And the capital allocation priorities for you.
[laughter] you know what for you I mean this is a this is a tricky question because you know everybody understand that if you generate less than 10, and you're part of EFI for sure Youre not going to be the first in line to get capital right, our logistics and our P&C.
And absolutely they come first or <unk> as well and this is why we're buying EPS right now what we have and the U S. Right now okay is to keep.
And and how are we going to grow it to emanate from.
Not because of our focus right now has always been to grow our specialty TL and if you look at our specialty T. O return on invested capital I mean were just above the 10, Mark I mean, we're 11 11, five something like that I mean, and and and this is fine because I think we could do better and we will do better over time now in terms of the regular.
And then if you look at the best company and the U S Aki and the best of the Bes and.
And you look at the return on invested capital is less than seven us where its 5.5.
It's not great.
Hey.
But we're not that far away from the best for the best So our goal is slowly get closer to the best of the best and and.
And believe strongly that we have the <unk> team, okay on the Greg or.
And also the acquisition of <unk>.
Right gives us another small truckload division, that's not doing too good okay, and you'd probably run at 98 O R.
And and now we have a plan of working TCA. This UBS truckload division with our CFR and management team and we're going to do a combination okay by the end of 'twenty, one and that should help us get closer to a six or six and a half and be the.
For the best now don't forget that.
No.
Introduction to the truckload market, Okay, five years ago, six years ago to the U S. Steel market. There was a goal behind that is to give us some size and the U S. So that we could you know one day listed and the U S. Now with the EPS for the acquisition I mean, most of our revenue okay will be.
And as domestic I mean, as a matter of fact and Q1, we have more U S. Domestic revenue then Canadian right.
So we'll be probably like 70, 525, 75 U S. And then we will see over time.
We're not and the business of selling companies, okay, well, we've done that before.
We've done that with our waste division.
So, but it's not on the card for now and what we're.
Trying to do working with Greg and his team over there.
And as to get closer to the best for the best in terms of the return on invested capital.
Yeah.
Okay, that's great.
And you follow up just on the P&C and network side, I mean, youre seeing very significant organic growth, which you're signaling will continue I mean, I don't recall, having seen that kind of growth and the network.
And a long time, obviously for you and I'm wondering is this.
Was the sortation network handling this type of growth.
Predominantly coming from the asset light side of things and how how are you handling.
Kind of is this kind of environment, we're in right now and it's and it's going to be on.
The need for capacity on expansion there.
Yeah very good question for you I mean for sure I mean on Toronto hub. Okay is very very very busy it's never been that busy okay.
And we're working on a plan right now to see what the next step is going to be.
So we're getting close to capacity over there.
So this is why we're looking at what can we do more okay in Calgary and what can we do more in Vancouver, and what can we do more in the in Montreal, So Calgary Web and new sorting center, we just opened that up a year ago. So there were doing fine, but and Toronto.
For sure we will have to do something there.
The GAC center, we're really busy.
But I mean, we could do more and and for sure. This is why were growing about 14 and 15% in terms of volume right now.
We were skeptical at first that are changing the mix from b to b to B to C.
You know with the pandemic there that would erode our margin, but if you look at our Q4. It was great. If you look at our Q1 this year again, we feel good.
We have some divisions not on capacity like Ics and <unk>, yes.
We could also do more within our Loomis operation So I mean, we.
And we could still see a 20% or 15% growth and in our E. Commerce in 'twenty, one and into 'twenty two but then we will you'll get closer to a capacity crunch right. So this is why we're working now to see how are we going to resolve that.
Thank you.
Cam James TD Securities.
Good morning and land.
I mean, if you could talk about how youre progresses with with the DLC acquisition.
The integration of that and and kind of how the just maybe update us on the opportunity set which I think is quite compelling and how thats shaping up relative to your expectations. When you when you acquired it.
Yeah, you know what day L. S. We're really happy about what's going on now in terms of the transition agreement. We believe like I said earlier on the call that by the summer I mean, we're gonna be a stand alone.
And with running our financial and Oracle instead of the SCB.
But in terms of revenue growth I mean, we were quite surprised to see how this team is doing I mean I was looking.
Last month, and we close in March I mean, the revenue growth was pretty impressive right. So I mean to me, it's really a fantastic acquisition because it gives us market intelligence on the U S. Domestic LTE on market. So that we can understand.
Okay.
And what the rates are what the value is et cetera et cetera. So it you know.
But over and above that I mean, we have a fantastic team there based on an agent model and we feel that we were running about a 600 $650 million business right now and.
And.
Is it possible that we could do a 1 billion dollar within the next two or three years, absolutely. The way we're growing right now I feel pretty good about that now for sure the margin is slim.
And we're running it for four and a quarter margin right now.
But the guys are working and we're gonna be working on reducing our overhead costs as soon as we can on the hook from from Don Lee.
And then work also on the margin with some some of our customers and working with the transportation company.
And providing a great solution.
For example.
Or what we call now on Ww T Force Ww and they were never involved and the trans border L. T O.
And we're just focusing on domestic shipments.
S for.
The trans border LDL into Mexico or into Canada is very important for us. So now those guys have put a plan and they're working on it now to see how they can grow that right because to US. This is one of the greatest market of the LPL as the trans border between U S and Canada and Mexico.
So feel good about this acquisition, it's really strategic to us.
And now with the Ups's free the acquisition now it gives us assets on the ground, Okay and working with the team there that we could.
Feel that we could grow this UBS freight.
As soon as we have a very solid foundation, which will take us maybe a year 18 months to be really really solid and control there of all of our costs.
Good day, we could grow this company we have the team there.
And we have the assets, we have the real estate to grow probably 40 or 50%.
The goal really the first goal is to be lean and mean and very cost efficient, but I'm, just saying that we have the assets to do it if the market can bear it.
Feel really good about the future over there.
Thank you and just.
Just one one follow up here.
On the return on capital and the business, which which as you pointed out is very strong really across most parts of the business.
So how do you think about.
And the future, adding more capital.
Versus increasing returns I mean are there any areas of the business and where you really don't I mean, it sounds odd to say it this way, but you don't want higher returns on capital are your preference is actually just to put more capital to work on.
Or is your thought that its still better off to kind of squeeze the assets get more or push your returns on capital higher.
Yeah.
That's a very good question. If you look at our P&C I think that a 20% return on invested capital net of tax okay.
It's difficult to do better than that I mean, if you look at the as an example, okay. If you look at the return on invested capital and the best LTE on company in the U S. The best.
The one that trades at 35 40 times earnings.
Okay, I mean, theyre going to be and that 20% neighborhood.
Right.
So to me if you asked me could you do better than 20% on your P&C I would say it and it's going to be it's going to be difficult I mean, we're working on it but it's not going to be easy now on the LTE outside I believe that what we're doing and Canada. I mean, it's got to be at least that in the U S. Over a period of two to three years.
Right.
So because you know you got the best of the best is at 20, you got another one that's 15. So we're about 15 ourselves and Canada, which is not as good of a market is the one and the U S. So we believe that <unk>, we could do better because of this UBS.
Freight acquisition and Theres a truckload.
The idea is really to try again to do more with less so how do we do that well we could do more with the owner operator model, we could do more with our brokerage operation and this is the focus of our this is why and when we bought <unk>. They had low brokerage operation whatsoever, right and it was menlo So menlo stayed with.
Ex PL, so us we end up with no asset light operation there. So we've build CFR logistics, okay, and it's doing well and is growing so that's going to help again get a better return on invested capital because it's it's all organic.
So it's always a balance okay and me and working with the team. It's always you know.
Where should we invest our capital and this is why a lot of times, we say, okay, well guys M&A is going to be our first priority buying back the stock if we feel that the stock is under pressure and we share now for its yes, we will do that right to improve again.
A return we will invest on assets as well so it's a balance.
Great. Thanks, very much and then.
Pleasure.
Our next question is from the line of Jason and set out with Cowen.
Thanks, operator, good morning.
And Jason.
And as it steps back on on Q.
<unk> C and C.
You see your margins over time as some of your BDC business. So it does start coming back because historically that was good.
Good margin business, because yes, you guys have a lot more package is soft and then the considerable and market.
Yes, yes, yes, we'll absolutely adjacent so for sure I B to B is still affected okay, because Ontario, and Quebec are on there are you know.
Some major locked down right now.
We've started to see some improvement.
<unk>, which is mostly b to b.
But then it fell through again, just lately about two or three weeks ago.
We believe that probably by the end of Q2 things should be back to normal. So we have to two divisions within our P&C the not running on.
And on all cylinders right now its Ics and <unk>.
Why because they were mostly dependent on b to b, So youre, absolutely right down the road, let's say in Q3.
For more closer to normal.
<unk> and Canada.
Ontario, Quebec, which as you know the law.
Largest provinces and there's a population so yes, our margin would probably help us in Q3 and in Q4.
With the right mix also a balance between B to C and B to B R. Loomis scan for operation Yes.
Don't forget we did about 19% and Q4 in terms of Oh.
And at our P&C operation and we did about 19% and our P&C. So.
And we do better than that and let's see if things are back to normal in Q4 of 'twenty one probably it's the same story with LDL.
Okay, that's great color on.
Focus a little on the book, which.
And give us and up about some of your.
And the initiatives there.
Why is that the adjacent net are you.
Campbell UBS free.
Logistics.
Oh and logistics, Okay yeah.
Logistics and logistics you you've got the two sectors, our last mile operation and in Canada is doing really really well our U S. Operation in terms of top line I mean were basically flat.
And we're just starting to see some growth opportunities. We're working on a few project, but our bottom line is definitely improving there.
And we're getting closer to a double digit EBIT there, okay, which is it's got to be our goal within let's say the next 12 to 18 months. So our operation is really humming.
Our guys are working on on all the costs and being more efficient and our sales team is also working on on adding more business tour and Thats work in terms of our D. L. S. R. W.
W. W Company I mean, those guys are organic lead they are growing quite well and the margin is still low.
We look at 4% to us and we say why are we at 4% below and then we look at some of the other players and are in the industry.
And you know one of the best guys also at 4%.
So, but we say you know what guys. We have to work on the overhead I mean for sure we have to do more with less there as well so over time, our logistics sector, you'll see because of this acquisition a lot of growth, but at the same time also.
Overall, our EBIT, there is running and between seven and eight are over.
Over time, we believe that we could get closer to 10, okay and with some organic growth as well.
So, let's say, we're at 7% to eight right now over time within 12 to 24 months can we get closer to 10, and we believe so.
Okay.
And everything and all the guys that we sell.
Thank you Jason.
Your next question is from the line of Cameron and <unk> with the National Financial National Bank financial I apologize.
Thanks, Good morning.
Hey, good morning so.
Just a clarification on the expected capex the net capex for 2021.
And correct me, if I'm wrong, but I think its what youre, indicating a $325 million U S is higher than what was the case a quarter ago and and I'm. Just wondering if that implies that there is some pull forward of spending from 22 into 2021, because I think that maybe a lot of the sort of significant EPS capex was originally going to be planned for <unk>.
2022, so just for you could just clarify what that means for I guess capex over the next.
18 months as opposed to just 2021.
Yeah. So you see Cameron and what we were able to do with the supplier is to get 1100 50 trucks into 'twenty. One so we put a lot of pressure on those guys. The supplier to make sure that we get all these trucks into 'twenty. One so you're right at first Okay. We were saying that within 12 months, Okay, and we should get the 11.
150 trucks, but now we put pressure on these guys. So it's gonna be instead of being 12 months over 12 months is going to be over the next seven months lets say, we take over and May sometime in may So we'll on that seven months.
We believe our quaint to the builder is they're starting building for us and July right. So because the orders already out I mean everything is out we know how much it's going to cost us et cetera et cetera. So.
It is ongoing we believe that we should get all those 11 and 150 trucks before the end of 'twenty. One. So this is why youre right. Its a little bit of a change versus going over 12 months now is going to be over seven months, yes.
Okay. So what does that imply I guess for 2022 and should we expect I mean, I guess, maybe the question is and what the kind of more normalized run rate Capex in 2022.
If you are making this huge investment in 'twenty one.
I think a camera and it's going to be more of the same and 22, because we cannot do the catch up capex only in one year.
So I think and your model you should expect that 'twenty two is going to be the same as 21, okay. Because we want to bring the age of this fleet closer to four to five and seven and a half to eight right now right. So.
And 21 and 'twenty two are probably exceptional years of catch up.
And normal should be more like normally like 23.
Okay got it and then that makes sense and.
And if I could just squeeze in a question about the I guess driver.
Issues I mean, I think it's well known whats going on but I'm just I'm wondering if you could maybe comment on what your expectation is for the ability to kind of keep and hire drivers in the U S. LDL, obviously, that's going to become more important for you I'm. Just wondering is it less challenging or more challenging in and LPL and the U S to find drivers.
LCL I mean U S and Canada, I mean, the turnover is not.
Absolutely and at the same I mean, we have no issues whatsoever, and Canada with our L. T L or package and courier guys, finding drivers and replacing the ones that are retiring and.
And the U S. I mean, we look at the statistics for <unk> I mean, it's not an issue it's not an issue I mean, it's truckload, it's a big issue, but non LDL.
Okay, that's what I thought I appreciate the time, thanks very much.
Cameron.
Your next question is from the line have been why per year with is Jordan capital.
Hey, good morning Ali.
And even better yes.
Just to come back on the previous question, obviously very strong fundamentals, but the question on the driver shortage. What can you say about the wage inflation and the ability to pass through those and wage inflation on pricing and potentially a direction on the margin whether it's in <unk>.
And your margin.
Yeah. So I mean right now the pass through is easy because the there's more freight than than drivers. So we are adjusting salaries to the drivers over the course of 21 and and the spot rate is just through the roof and the contract craze has been renewed with 789 10 and 12% right.
Now so it's not an issue. So if you look at you know we just bought six months ago MCT, Okay, which is you know a re for a division and we had about 200 drivers and we're doing really really really well with this division right now and I mean this.
Division operated and sub 85 O R.
In Q1 of 'twenty one.
And we believe that those 908 to 900 drivers in the truckload division of UBS that Greg or and his team will take over soon okay.
And those guys are running at 98 or right now I mean, we believe firmly believe that this is going to be a huge asset because we're adding we're adding okay. Those eight and 900 drivers, okay and a market that is.
It's a fairly great market for the truckers.
So we believe that we could use this these drivers and in a better way that they're being used today, if I can say that right because the freight is a bonded.
And those guys are hauling freight probably at rates that don't reflect the market. So on the truckload world. We believe that we can turn this truckload division around much faster than we can turn around okay. The LPL division because truckload is is more of a REIT.
Actions faster and then the LTR LTE all our focus is going to be more on cost and yes pricing to what the big focus is mostly on the cost side, but the truck okay.
On cost, but also market.
Pricing very fast there.
Okay, that's great color on land with respect to your leverage ratio of 175 to two <unk>.
Take you to does it take into account and the cash and given its pretty LT.
Any color about the capital and low for the tuck in M&A for the remainder of 2021 and maybe the opportunity to pursue share buyback.
Right now when I say, our leverage is going to be between $1 75 to two theres minimal M&A and there except that UBS staying there and right now there's no share buyback. Okay. So we did some in Q1, Okay. We may do some in Q2, three and for depending on the valuation of the stock for.
Sure we have a target in mind, we know I mean I've been involved with this company for more than 25 years. So we are we know where we're going so if we see weakness and the stock absolutely I mean, we will we will be active on the buyback I mean.
We bought back with IV and 642000 shares in Q1, which is minimal okay, but can we buy another million shares in between now and the rest of the year, absolutely I mean, our leverage is going to.
And our plan is going to be much closer to 175 and two anyway.
That's great color. Thank you ally.
Youre welcome.
Your next question is from the line of Walter <unk> with RBC.
Okay.
Good morning Walter.
I'd just like to come back to P&C and I think our strategy is a good one and the sense that <unk> got capacity youre going to grow into that capacity at a fairly fairly.
Fairly healthy clip in the near term.
Mentioned and in answer to a prior question that you start to get up to your capacity limits, perhaps next year, obviously youll have.
Higher EBITDA once there my question is more longer term I know you've indicated longer term some challenges with regards to growth after were through the systemic growth period.
Driven by the lack of acquisition opportunity how has your thinking changed around that that division longer term do you double down and.
And invest heavily and adding capacity after you hit it next year or do you look at other alternatives for that division.
You know what Walter that's a very good strategic question and you know if you go back in time and the reason we sold our ways division as it was because we cannot grow and anymore right because our valuation was so low and buying assets. It was dilutive to us so finding a weekend, we didn't want to do that but we have to do it so.
And we sold on our.
And our waste management company at the time and.
Okay. So you look on a P and see where we're really doing really really well, but then as you just said I mean, we will come to a point and 23 were okay and we're all day looking at the possibility what do we do and Toronto right. So this is Toronto is the big hub for US and this is why we're looking at the question.
Now and.
For sure we have capacity in other markets, where we're getting tight and Toronto. So there will come to a point.
Is there is there some M&A possible is there something that you could do on them and is there some basis their partnership that you could do with somebody else right.
So if you take for example.
Some of our competition of major hubs. Okay is there any way that we could do a deal with them and help them and help us at the same time. So don't forget that this discussion that we're having with our friends and Atlanta.
Think of.
It could be and way more than just this transaction that we should be closing on.
Soon.
I think that Oh.
Because we have a relationship with those guys can we expand more of this relationship and Canada working with them is there anything that we can do and at what time will tell but we're looking at every opportunities of what we can do okay.
And I'm not a big fan of investing $100 million to $200 million and with low returns right. We could do it we could invest for a 100 million no question, but I need the returns.
And we're not very patient and so if the Guy tells me and while the returns are going to take 15 years, we're going to try to find the other issues other opportunities right.
The effective tax rate I know you mentioned there was some movement and your tax rate there.
But going forward, what effective tax rate should we should we build in and and is most of that cash taxes or or should we look at our cash tax rate that is somewhat lower than you are effective.
Yeah, I would say I'm, not a big specialists and Walter on on cash tax or tax, but I would say that what you see right now around the 25% Mark.
We don't know what's going to happen with the tax rate and the U S. There's some discussion there with a mistake by then.
And that they may change that so right now I think that if you. If you work with a 25% I think it's reasonable that.
They change.
You know, we don't even know what Mr. Trudeau could do and Canada, I mean, because you have huge deficit. There. So maybe there's going to be some changes there, but I don't anticipate anything major for 'twenty. One we'll have to see for 22. Okay. Appreciate the time as always and I. Thank you for.
Sure Walter.
And your last question will come from the line of Sanjay Ramaswamy of Bank of America.
Alright, Thanks for squeezing me in.
Just with regards to U S. Truckload I mean last mentioned and then obviously <unk> was a bit of a disappointment so revenue per total mile up around 8% that's on the appeal.
And up into double digit range and maintain.
Look we're just off and that it's more of a function of the more contract business that you guys have and less of a spot spot market exposure, maybe maybe some color on that would be helpful.
Yeah. So so I think what happened in Q1 is that in one of our division TCE I mean.
There was some issues with some dedicated worried that that we've lost and we weren't able to replace a quite fast enough right.
But if you look at going forward. If you if we look at April into Q2 and in two three and for we believe that this was just a one time event for us in and Q1.
And also the fact that we're.
And we're getting.
About 900 drivers through the UBS acquisition, and our truckload division and the and also the demand is really there so and the consolidation that we're going to go through in 'twenty. One we believe that this will also have an effect of reducing our overhead.
On the overhead that we get from the U S truckload division on top of the <unk> and on top of the TCA, if you sum that up for.
For sure there's going to be some savings there to bring us back to more of a sub 90 or or around 90, then being and $92 90 between 90 for a guy.
Yes, that's really helpful.
And just for my follow ups and some of the employee count that you guys have it was down around about 1600 year on year and about 300, and CP sequentially, noting that was mainly in the <unk> businesses. I mean, how do we think about that kind of moving through 2021 ex the EPS.
<unk> acquisition and the employees coming on that bedroom to.
Are we going to see that employee count continuing to come down despite the volume environment.
And thank them.
It's too early to say, what we can do over there, but one thing is for sure is we believe that we have to do more with less.
That's what we've been doing all the time.
Religion, and Tia fight every day, you ask yourself, how can you do more with less.
And less means less asset means less people better technology better tools.
Okay, because we are competing okay, and Canada with some very fierce competition, both in the P&C <unk> and truckload.
We look at the <unk> market and the U S and there are some very very good transportation company over there. So we have to compete with these guys and right now I mean, although like UBS management and said on the call yesterday that the division did better and Q1.
We're still a far cry from where we should be I mean, the trend is good okay fine.
Probably.
Once we take over the company, we're going to have to accelerate okay. The change and the improvement that's been taking place right now.
Alright. Thanks.
And that does conclude our Q&A session and I will turn the call back over to Ellen and better for any closing remarks.
Okay, well, thank you operator, and I want to thank everyone for joining us on this morning's call.
And so on behalf of the team at <unk> International We appreciate your support and we're working on it hard on your behalf each and every day.
And I look forward to updating you on our progress next quarter and hope that you remain safe and the months ahead and as always please don't hesitate to reach out with additional questions. Thank you again and I hope that you enjoy the rest of your day. Thanks Bye.
Thank you. This does conclude today's conference call you may now disconnect.